Swedish Administrative Court of Appeal did not consider multiple-year data, adjusted the taxable result

By Emiliha Ferrão, transfer pricing specialist, Censio Tax, Stockholm

In November 2021, Sweden’s Administrative Court of Appeal ruled in favour of the Swedish Tax Authority in a case involving a change of transfer pricing methodology, and a restrictive use of multiple-year results to support an arm’s length income.

Background

The Swedish branch of CMA CGM Scandinavia AS in Norway acted as a sales agent and provided shipping services. 

Before 2016, the branch received a commission-based remuneration for services provided. The commission was based on volumes shipped and resulted in losses for the branch in 2014-2015. In 2016, the transfer pricing method was changed from the commission-based model to a cost plus-based model using a mark-up on total costs as the profit level indicator. According to the branch’s 2016 transfer pricing documentation, it was deemed a limited risk service provider entitled to a routine remuneration.

The claims

During 2014-2015, the taxable income of the branch was not considered as arm’s length due to internal dealings, according to the tax authority. Based on information the branch provided, the tax authority claimed that the branch acted as a limited-risk service provider in 2014-2015. The tax authority also claimed that the commission-based model used for allocating profits to the branch did not reflect its function and risk profile. The branch did not provide supporting evidence that any functions or assumption of risks had changed, which triggered the update in transfer pricing method. Instead, the branch argued that the change in model was mainly attributable to macroeconomic circumstances and that the group wanted to implement a less volatile model for its agents. According to the tax authority, any shifts in risk allocation between the parties were attributed to the changed transfer pricing method, than to actual changes in functions performed or assets employed by the branch.  

The tax authority decided to adjust the branch’s taxable income for 2014-2015 using the transactional net margin method, with a mark-up on total costs as the profit level indicator, and imposed tax surcharges for providing incorrect information as a base for taxation.

The branch appealed the decision and claimed that the tax authority should consider the branch’s total taxable income during a longer period of time and take into account the branch’s more profitable years. The total taxable income during the period of 2009-2015 with the commission-based model was higher than it would have been using the cost-based method, according to the branch. Furthermore, the branch stated that a commission-based model was commonly used in the shipping industry and that the branch’s fluctuating results were caused simply by varying shipping rates and price index.

The court’s decision

Stockholm’s Administrative Court of Appeal had to decide if the Swedish tax authority had proven that the profits allocated to the branch based on the commission model in 2014-2015 were not in accordance with the arm’s length principle and, in that case, how the results instead should have been allocated. The court agreed with the first administrative court and concluded, like the tax authority, that the branch’s functional and risk profile was of a routine nature both before and after the model change. Therefore, the branch was considered a limited-risk service provider in 2014-2015.

The branch should have taxable income reflecting its limited-risk profile, which was not the case during 2014-2015 when the branch was in a loss position, according to the court. 

The court referred to case law where multiple years are considered to determine an arm’s length remuneration. The use of multiple-year data requires that the applied methodology is in line with the branch’s functions, risks, and assets for all the years. According to the court, the transfer pricing method used for years before 2014 was not in line with the functional profile and, therefore, the multiple-year analysis could not be applied in this case.

Hence, the court concluded that the taxable income allocated to the branch in 2014-2015 was not in accordance with the arm’s length principle and instead should be allocated according to the tax authority’s calculations, including tax surcharges.

Comments

In Sweden, there is case law supporting the consideration of multiple years when analysing taxable results according to the arm’s length principle. The court, however, strictly applied the principle of analysing each fiscal year separately and emphasized that the conditions to apply a multiple-year analysis require an application of an arm’s length transfer pricing methodology—the most appropriate method—during the entire period.

In summary, a taxpayer cannot apply an inaccurate transfer pricing methodology and argue a multiple-year analysis to support the arm’s length nature of the dealings.

In general, it is evident that when changing transfer pricing methods, it is crucial to show actual differences in the functional and risk profile as a reason for the change of method. 

It can also be noted that the Swedish Tax Authority used the branch’s benchmarking analysis as the basis for the adjustments. However, the tax authority rejected several chosen comparables due to lack of independence and insufficient information, such as websites, at the time of the tax audit to confirm comparability. The adjustments to the benchmark the tax authority made were not contested in court.

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Emiliha Ferrão

Transfer Pricing Specialist at Censio Tax

Emiliha is an authorized tax advisor who has worked with tax and transfer pricing for six years at several international advisory firms in Stockholm. Emiliha is a frequently engaged transfer pricing lecturer and has during recent years gained extensive in-house transfer pricing experience at large multinational companies. Censio Tax aims to simplify transfer pricing and always strives to translate theory into sustainable solutions. We are an independent full-service transfer pricing advisory firm working with consultancy as well as interim in-house solutions across the Nordics.

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